Many directors believe that running a limited company means unlimited protection. Chris Worden explains why this is a myth and what you need to know to avoid personal liability for company debts.
- Limited liability is not absolute protection
- Personal guarantees and overdrawn loan accounts create risk
- Wrongful trading and misuse of bounce back loans can lead to liability
- HMRC has increasing powers to pursue directors personally
- Early advice is key to protecting yourself
Understanding Limited Liability
Limited liability means the company is a separate legal entity. Directors are protected unless they break the rules, blur business and personal finances, or act irresponsibly.
Common Triggers for Personal Liability
1. Personal Guarantees
If you have signed personal guarantees (PGs) for loans, leases, or supplier agreements, you remain liable even if the company is liquidated. These debts survive liquidation and lenders are increasingly diligent in enforcing them.
2. Overdrawn Director's Loan Accounts
Taking more money out of the company than you put in creates a personal debt. Insolvency practitioners will pursue you for repayment, especially if you have assets.
3. Wrongful Trading
Continuing to trade when you know the company is insolvent can make you personally liable for new losses. Insolvency is determined by cash flow, balance sheet, and legal actions like CCJs.
4. Misuse of Bounce Back Loans
Improper use of bounce back loans, such as taking multiple loans or using funds for personal reasons, can result in personal liability, even years after the loan was taken.
5. Preference Payments and Transactions at Undervalue
Paying certain creditors ahead of others or transferring assets below market value can be challenged by insolvency practitioners, leading to personal claims.
6. HMRC Personal Liability Notices
HMRC can make directors personally liable for tax debts if they believe there has been deliberate wrongdoing or neglect.
When Are You Not Personally Liable?
If you act responsibly, seek advice early, and avoid signing personal guarantees, you are generally protected. Understanding your director's loan account and keeping accurate records is crucial.
How to Protect Yourself
- Seek professional advice as soon as cash flow issues arise
- Do not continue trading recklessly if insolvent
- Review and understand all personal guarantees
- Keep management software up to date
- Negotiate with creditors if necessary
Key Takeaways
- Limited liability is not a guarantee against personal claims
- Personal guarantees and overdrawn loan accounts are major risks
- Wrongful trading and tax issues can trigger personal liability
- Early, informed action is the best protection
- Chris Worden and Director First can help you understand your options
Frequently Asked Questions
- Can directors be personally liable for company debts?
- Yes, especially if they have signed personal guarantees, have overdrawn loan accounts, or have acted wrongfully.
- What is a personal guarantee?
- A personal guarantee is a director's promise to repay company debts if the company cannot.
- What happens if I misuse a bounce back loan?
- You could be made personally liable for the loan, even years later, if funds were misused.
- How can I avoid personal liability as a director?
- Act responsibly, seek advice early, avoid personal guarantees, and keep accurate records.
- What should I do if I have an overdrawn director's loan account?
- Get professional advice to understand your position and negotiate a settlement if needed.
Need tailored advice? Contact us today for a free, confidential review of your situation.
